How do you know when refinancing your mortgage makes sense? The old rule of thumb was to wait until interest rates fell at least two percent below your current rate. That no longer holds true. 

One thing to keep in mind though: The interest rate isn't the only thing to consider when shopping for a new loan. Refinancing, after all, isn't free. There are the bank fees, the bills for a new appraisal and inspection, your lawyer's fee - you name it. Here is a simple formula that can help you decide whether or not it is time to refinance your mortgage. First, compute the difference in your monthly payments between your current loan and the proposed new loan. For example using $100,000 as the loan amount, let's say your current payment at 10 percent is $877 and the new loan amount is $103,000 (that's $100,000 plus the cost to refinance). The new loan monthly payment at 7.5 percent is $720, a savings of $157 per month.

Now divide the cost of refinancing ($3000) by the amount you will save each month ($157). The result in this case is a little over 19 months: $3000/$157 = 19.1 months. So it will take about 19 months for you to break even. If you were planning to move in 12 months, this is probably not the best time to refinance. However, a smaller monthly payment might make sense to your family's budget.